Bond yield shoots up; another interest rate hike likely in June

Bond yields shot up on Wednesday after the Reserve Bank of India (RBI) increased the repo rate by 40 bps to 4.4 per cent by calling an out-of-turn meeting of the monetary policy committee (MPC). The yield on the 10-year government bond jumped 26 bps to close the day at 7.38 per cent while yields on the 3-year and 5-year bonds went up by 39 bps and 31 bps, respectively.

Yields could go up further as the central bank is seen to hike interest rates again in the scheduled policy review meeting in June. “With inflation likely to remain above 6 per cent for H1-FY23 and risks of it staying high even in H2, more rate hikes from the MPC seem likely,” said economists at Standard Chartered Bank said, which is now expecting another 35 bps hike in June meeting.

“We also increase our repo rate increase forecast from 100bps to 150bps by end-2022 (including the 40bps increase delivered today). The remaining three MPC meetings post June in 2022 are likely to see 25bps hikes each,” they added.

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said he expected repo hikes in June and August policy review meetings too.

The upcoming bond auction on Friday is likely to set the tone for the bond market. “The auction will give an indication of the RBI’s comfort level with the yields. It is to be seen if there is any devolve,” said the treasury head from a large public sector bank.

In the previous policy review meeting in April, the MPC increased the inflation forecast for the current financial year to 5.7 per cent, with Q1 at 6.3 per cent; Q2 at 5.8 per cent. While the RBI has not given a new forecast in today’s meeting but highlighted upside risks to its inflation projection. Market participants said there was a possibility that the MPC may fail to achieve its mandate — maintaining average inflation of 2-6 per cent for three consecutive quarters.

“In India we are just where the US Fed was a few months ago and yields may face an upward pressure across the tenor of the curve, though liquidity reduction adds an additional element of adjustment at the shorter end,” Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund.

“The bond yield curve is likely to shift up as markets price in more aggressive rate action by the RBI. While there could eventually be some value buying at the long-end of the curve — providing some comfort — for now we expect the “pricing-in” effect to dominate and push the 10-year yield to 7.5%,” said Abheek Barua, Chief Economist, HDFC Bank.